Legal Definitions - policy loan

A policy loan is a loan given by an insurance company to a policyholder, using the policy's cash reserve as collateral. This means that the policyholder can borrow money from the insurance company and use their policy as security for the loan.

For example, if John has a life insurance policy with a cash value of $10,000, he can borrow up to that amount from the insurance company. The loan will accrue interest, which John will need to pay back along with the principal amount borrowed.

Another example is if Sarah has a whole life insurance policy with a cash value of $50,000. She can take out a policy loan of $20,000 to pay for a home renovation. The loan will be charged interest, which Sarah will need to pay back to the insurance company.

Policy loans are a way for policyholders to access the cash value of their life insurance policies without surrendering the policy. However, if the policyholder does not pay back the loan with interest, the outstanding balance will be deducted from the death benefit paid to the beneficiary upon the policyholder's death.